Optimal Capacity Adjustments for Supply Chain Control

Decisions on capacity are often treated separately from those of production and inventory. In most situations, capacity issues are longer-term, so capacity-related decisions are considered strategic and thus not part of supply planning. This research focuses on optimal supply planning with emphasis on variable capacity to meet uncertain demand. It also defines three levels of capacity change: operating hours, labor availability and production hardware availability. The work presented here deals with the fundamental decisions to determine capacity, production, and inventory to meet customer demand while optimizing revenue and costs over a planning horizon (typically the life of the product). With the Lagrangian technique for constrained optimization, it can be shown that the optimal supply capacity has upper and lower bounds. The optimal feedback policy prescribes increasing the supply capacity when at the beginning of the planning interval it is below the lower bound. Similarly, the supply capacity should be decreased to the upper bound when it is above the upper bound. This paper will present arguments for characterizing forecast evolution and information sharing in the supply chain to obtain a predictor-corrector approach to supply chain control.